Presented at Roosevelt University
September 7, 2010
ShoreBank lived for 37 years. Its founders acquired the $40 million South Shore National Bank in August 1973. The FDIC seized the $2.1 billion ShoreBank in August 2010. In between, ShoreBank evolved from a small bank serving one community of about three square miles and 80,000 people on the South Side of Chicago into an international icon that inspired, nurtured, and spread the principles of development lending throughout the world. The founders of ShoreBank were the first consultants to future Nobel Peace Prize winner Mohammed Yunis. Their counsel helped turn his insight that poor people deserved and would repay credit into reality. ShoreBank Corporation, the parent holding company then called the Illinois Neighborhood Development Corporation, was the first to seize on the idea that fostering community economic development needed more than just a bank. A bank, after all, is a reactive institution; it can only lend money to others who then initiate action, whether buying a home, improving a business, or rehabbing an apartment building. So, in the 1970s, the holding company created a non-profit to focus on job training and placement; a loan fund to assist minority entrepreneurs reach scale; and a real estate development company to catalyze neighborhood revitalization in South Shore.
Eventually, ShoreBank spread its banking activities through much of the South and West Sides of Chicago, the East Sides of Cleveland and Detroit, and the Pacific Northwest. It spread its non-banking activities throughout the United States and the developing world. ShoreBank Corporation founded and managed the National Community Investment Fund, which is now the largest single investor in community development financial institutions in America. The non-profit Center for Financial Services Innovation has become the nation's leading authority on financial services for underbanked consumers. Through its subsidiary, ShoreCap Management, ShoreBank raised a $28 million fund to invest in banks serving small and growing businesses in the developing world. That fund, created in 2003, has achieved a rate of return greater than 25%. A second fund, which has raised $50 million so far, is in the process of making its first investments. The achievements of the international consulting firm, ShoreBank International Ltd., are truly breathtaking. SBI's practice spans the entire developing world. Its clients and partners are the major international development agencies including the European Bank for Reconstruction and Development, the Gates Foundation, and the International Finance Corporation. In 2009, ShoreBank International facilitated more than 10,000 development loans with an average loan size of $5,000. It trained 485 loan officers, more than a quarter of them women. It raised $62.6 million of debt capital for BRAC, one of the largest microfinance organizations in the world, to fund its initiatives to combat poverty in Tanzania, Uganda and Southern Sudan.
I have reviewed the activities of some successful ShoreBank ventures, but there were failures along the way too, and even the successes had their share of growing pains. The whole ShoreBank concept was an experiment, and experiments are never a series of unqualified successes. Through all the growth and the trial and error, the heart of ShoreBank remained where it started, at the corner of East 71st Street and Jeffery Boulevard in Chicago's South Shore. The bank was by far the largest of the many for-profit and non-profit ShoreBank companies. It was the engine, providing the bulk of the profits that drove the whole machine. A banking engine is fueled by its liabilities; that is, its deposits, which are the funds lent to it by its customers and which the bank in turn lends to its borrowers. In low- and moderate-income neighborhoods, the demand for credit inevitably and continually exceeds the supply of deposits. If ShoreBank had simply relied on local deposits for funding, it might have been a moderately successful small community bank, but it would never have achieved even its relatively modest initial goal of revitalizing a single urban neighborhood. The decision, taken in 1975, to reach beyond the community for funding had monumental consequences that went very far beyond the immediate objective.
I am now going to indulge in a little digression to explain a concept that's essential to understanding the ShoreBank story. Many early small-group agricultural societies had a shaman whose job was to make rain at the critical seasons. There was nothing hypocritical about the job; the whole group including the rainmaker truly believed that the rainmaker could make rain. The rainmaker prayed, fasted, and engaged in the arcana of his trade without which he had no power. Usually, of course, the rains came in their proper season, and the rainmaker was duly honored. But rains don't always come. Then the rainmaker had to pay, if he was lucky, merely with disgrace; if not, with his life.
Translated to the modern corporate realm, rainmakers are people who develop successful lines of business where others saw no opportunity. ShoreBank succeeded because it had rainmakers. The founders were the original rainmakers, but as the scope of their activities widened, other rainmakers in key areas stepped up. ShoreBank was a collegial enterprise, built on initiative and integrity. In strict hierarchical organizations, rainmaking is squelched; at ShoreBank it was encouraged and essential. There were rainmakers at many of the non-bank companies, but I am going to focus on the bank.
The first of the bank rainmakers was actually a series of three extraordinary women who succeeded one another in the creation and leadership of raising deposits outside the community. It may not be obvious now quite how radical an idea this was in the mid-1970s. Mechanisms for transferring money were primitive by today's standards, and your bank was a nearby place you physically went to to transact business. The first of these women started with the idea that Catholic women's religious orders—that is, nuns—would be willing to support ShoreBank's development mission as long as they could get a competitive rate for their deposits. The value proposition was simple. The rainmaker and her staff got the rates each day that all the large banks in Chicago were paying for CD's over $100,000. (Back then, those were the only unregulated deposit interest rates.) Then they called the nuns and told them ShoreBank would match the highest rate at each maturity. From that little acorn, the business expanded into an oak whose branches spread across the country, in the process sparking the socially responsible investment movement. Mission-based deposits grew to be the main source of funding for the bank's loans, but the value proposition remained the same: Fostering community development was the sizzle, but a competitive rate of interest was the steak. ShoreBank now had the fuel to expand its operations.
The second rainmaker involved a bit of a secret. No bank loans out all its funds. A greater or lesser portion is always invested in bonds, which provide additional income combined with safety and liquidity. In 1997, ShoreBank decided to leverage its capital; that is, to tap the growing array of wholesale money sources for the purpose of funding a larger bond portfolio. Under its rainmaking manager, the investment portfolio eventually grew to more than three-quarters of a billion dollars, about a third of the bank's assets, and produced a substantial share of its profits. It was a secret, though, for two reasons. First, unlike lending, deposit-taking, or operations, not many people in the bank were involved with the investments, so not many people knew much about them. But more importantly, not many people could know about them. The fact that such a significant portion of the bank's profits were generated by the investment portfolio conflicted with the central ShoreBank theme that it was profitable because of its mission. Belief in this theme was essential, not only in raising deposits but in motivating ShoreBankers. It was a central tenet of the ShoreBank story, but the truth was more complicated.
ShoreBank had three main lending lines of business: single-family, business, and multi-family. The first two were, at best, never more than marginally profitable. They had high overhead costs relative to the amount of loans outstanding. Delinquency, while not usually higher than industry standards, always took its toll. Multi-family, though, was extremely profitable for two decades and was the creation of the greatest rainmaker of all. But in 2009, the multi-family loan portfolio crashed stunningly and so did its rainmaker.
Much of Chicago's South Side was built up during and just after World War I. Many of its buildings are three-storey brick walk-ups in configurations of three, six, twelve or more apartments. The inhabitants were whites of various ethnicities until the 1950s. At that point, African-Americans, many of whom had come to Chicago to work in heavy, war-related industries, finally began to push beyond the boundaries of the small mid-south Black Belt. The populations of South Side neighborhoods changed dramatically, from nearly all white in the 1960 census to nearly all black in the 1970 census. But the ownership of the apartment buildings was slower to change. Some were owned by outright slumlords, others by absentees. Whether deliberately or through force of circumstances few owners would or could screen tenants properly or keep up with needed repairs, let alone modernizations.
Beginning in the late'70s, a rainmaker in ShoreBank's loan area began experimenting with innovative lending practices and structures to return ownership of South Side apartment buildings to local owners. He lent to people with hands-on skills who got quality rehab done cheaply, people who lived in or near the buildings they owned, people who knew how to bring in good tenants and keep out bad ones. He lent based on the value of the buildings after they were completed, not as they were. Most of all, he lent on character, dispensing with red tape and formality. The results were spectacular. By the mid-2000s there were virtually no vacant apartment buildings in the areas surrounding ShoreBank's main offices. More than forty thousand apartments had been renovated and over a hundred local families and groups were working full-time in the real estate business. Delinquency was extremely low and actual losses almost nil. If a borrower got into trouble, it was usually for personal reasons, such as a divorce or an illness. The rainmaker could always find another good borrower to step in and take over before any real damage was done.
But the glowing success hid flaws that eventually brought ShoreBank to grief. On the South Side, every fourth north-south street—71st, 75th, 79th and so on—was built for shopping. Through the 1960s, local commerce throve, but by the time ShoreBank arrived in 1973, it was foundering. The bank's initial efforts were directed toward reversing the decline. ShoreBank lent to small shopkeepers and initiated projects to renovate larger stretches of the commercial strips. Virtually all the loans defaulted, and even the one truly successful project failed to lure retailers to adjacent properties. The old shopping blocks have long been studded with vacant, derelict buildings. The few stores still open offer nothing but the most basic products and services. As a result, the only significant local commerce was in multi-family real estate. And, as it turned out, the only significant market for multi-family real estate transactions was ShoreBank. In the past, there were always other lenders, but none did more than a few deals or were active for more than a brief time. When the recession hit, these lenders were gone, and they haven't come back.
As their tenants lost their jobs, the apartment building owners ShoreBank lent to could not both maintain their buildings and service their loans. Because ShoreBank was the only lender left, there was no market to sell or refinance the buildings. It was then that all the shortcuts in analysis and the idiosyncrasies inherent in character-based lending came home to roost. They hadn't caused the delinquencies, but they made remediation much more difficult. The Bank had lent to some borrowers long after they were overextended. In other cases, collateral was insufficient, even when the loans were originated. By mid-2009, the multi-family portfolio was a shambles, and the rainmaker had been forced to leave ShoreBank.
In a larger sense, though, the reason for ShoreBank's demise is very simple. The economic crisis was not a recession in ShoreBank's neighborhoods. It was and remains a full blown depression, with unemployment rates of 30-40% and no end in sight. In fact, with the expected cutbacks in local and state government jobs, it's likely to get worse. The manufacturing jobs that brought African-Americans from the rural South to Northern cities are gone. Affluent and middle-class African-Americans can find more house for the money on the South Side, but they don't shop where they live and they send their kids to magnet schools or private schools. The original African-American residents of neighborhoods like South Shore are aging. Many of the newer residents are those dispersed from the demolished high-rise housing projects. And, with the exception of a tiny number of so-called "urban pioneers," non-African-Americans still do not move into black neighborhoods in Chicago.
Once many years ago, in a famous moment in ShoreBank's history, our lawyer said, "If ShoreBank woke up one morning and found it wasn't close to the edge, it would do everything it could to get back there as soon as possible." ShoreBank was an enterprise that always worked at the edge. It took big risks, and deep down it always knew that some risks were bigger than it could manage. The worst economy since the Great Depression was one of those risks. But while ShoreBank failed in the end, it succeeded for nearly 40 years. It has changed the world. It was a spark, an innovator, and a model for the enormous pool of talent and energy working on economic development issues around the world today. Its legacy lives on in organizations it founded and that continue to operate such as ShoreBank International. Its legacy lives on through its many alumni whose passion for economic development was kindled at ShoreBank. Its legacy lives on in the lives of millions who have benefited from its services. ShoreBank may be gone, but its ideals remain. That's what sustainability is all about.